Block Trade: Definition, How It Works, and Example

What Is a Block Trade?

A block trade is a large, privately negotiated securities transaction. Block trades are arranged away from public markets to lessen the effect on the security's price. They are usually carried out by hedge funds and institutional investors via investment banks and other intermediaries, though high-net-worth accredited investors may also be eligible to participate.

The New York Stock Exchange and the Nasdaq define a block trade as one involving at least 10,000 shares of stock, or one worth more than $200,000. Most block trades far exceed these minimums.

Understanding Block Trades

A bulk-sized sell order placed on a stock exchange may have an outsized effect on the share price. In contrast, while a block trade negotiated privately will often provide a discount to the market price for the buyer, it will not inform other market participants about the additional supply until the transaction has been publicly recorded.

Block trades not yet publicly disclosed are considered material non-public information, and the financial industry's self-regulatory organization, FINRA, prohibits the disclosure of such information as front running.

Block trading facilities and block houses are specialized intermediaries that can facilitate block trades. Block houses are departments within brokerages that operate dark pools, private exchanges where large buy and sell orders can be matched out of public view. Block houses can also break up large trades on public markets to conceal the scope of additional supply, for example by placing numerous iceberg orders.

Block Trade Example

A hedge fund wants to sell 100,000 shares of a small-cap company near the current market price of $10. This is a million-dollar transaction on a company that may only be worth a few hundred million, so the sale would probably push down the price significantly if entered as a single market order. Moreover, the size of the order means it would be executed at progressively worse prices after exhausting demand at the $10 asking price. So the hedge fund would see slippage on the order and the other market participants might pile on, shorting the stock based on the price action and forcing the price down further.

To avoid this, the hedge fund can contact a block house for help. Block house staffers would break up the large trade into manageable chunks. For example, they might split the block trade into 50 offers of 2,000 shares, each posted by a different broker to further disguise their origin.

Alternatively, a broker could find a buyer willing to buy all 100,000 shares at a price arranged outside the open market. This would typically be another institutional investor.